Expert Answer:I need explanation in short essay for an article.

Answer & Explanation:Please I will provide you with an article and I need a 1 pg-2pgs short essay answer explaining the main points and one example if possible please. The article is about : the virtue Of Monopoly to the line that says : policies and their index-fund investments.A FATEFUL BATHROOM BREAK is not included, only the first 20 lines ( virtue of the monopoly ).

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The Virtue of Monopoly
Salmon, Felix . Foreign Affairs ; New York Vol. 98, Iss. 6, (Nov/Dec 2019): 184-190.
ProQuest document link
[…]Darkness by Design has an uncommon richness to it. Before the 2008 financial crisis, for instance, two U.S.
bank regulators-the Office of Thrift Supervision and the Office of the Comptroller of the Currency-competed with
each other to attract banks, which could choose which agency’s regulation to submit to. (Blame congressional
politics: the cftc is governed by the House and Senate Agriculture Committees, whereas the sec is governed by the
House Financial Services Committee and the Senate Banking Committee.) In earlier days, the concentration of
market power at the nyse made up for this regulatory confusion. Dark pools exploded in popularity after 2005,
since large institutions could no longer count on the nyse’s specialists to provide ample liquidity and found
themselves being outpaced by HTFS on smaller exchanges. Because orders placed in dark pools are not visible to
other traders until they have been executed, the hope was that HTFS would not be able to make money frontrunning these transactions.
The Virtue of Monopoly
Why the Stock Market Stopped Working
You’ve heard the story many times. The stock market is rigged. A highly secretive group of opaque financial
institutions is making billions of dollars from socially useless high-frequency trading-placing and withdrawing
stock orders hundreds of thousands of times per second-with all those profits coming, in one way or another, from
the rest of us. The biggest losers of all? Small, mom-and-pop, or retail, investors, who cannot hope to compete.
Perhaps the best-known proponent of this narrative is the author and financial journalist Michael Lewis. In his
2014 book, Flash Boys, Lewis painted the stock market as a battle in which the good guys were losing to the bad
guys. The book sold well and even instigated a handful of criminal investigations into high-frequency traders
(HTFS), none of which bore any visible fruit. For the truth is that even with the rise of high-frequency trading since
the early years of this century, actual mom-and-pop investors have never had it so good. Armed with online
accounts offering trades for minuscule fees, they see their transactions go through instantaneously, without the
sorts of delays that can allow the market to move against them before their order is filled. If the stock market is
broken, it’s not broken in a way that is obvious to retail investors.
Yet Lewis was right to worry about HTFS; he just misidentified their main victims. This is the revelation at the heart
of Walter Mattli’s masterful Darkness by Design. Great books make you reexamine your assumptions, and this one
delivers in spades. It not only offers a compelling critique of how the stock market has evolved over the past 15
years; it also forces readers to reconsider the idea that competition is good and monopolies are bad. What has
truly tilted the playing field in favor of a handful of financial behemoths and HTFS, Mattli argues, is the growing
fragmentation of stock markets, a process actively encouraged by misguided government regulators. The biggest
losers of that development are not retail investors, who tend to be fairly well-off, but pension funds, insurance
companies, and other major institutional investors.
Those financial behemoths are, in fact, the proverbial little guy. One of the paradoxes of financial terminology is
that terms such as “retail investor” and “small business owner” connote the relatively impecunious, whereas in fact
those investors and owners are disproportionately likely to be in the top one percent of the wealth distribution. The
big investors-pension funds, insurance companies, mutual funds, and exchange-traded funds-are much more likely
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to be holding the wealth of the 99 percent. Ordinary investors are being ripped off every day; they just don’t see it,
because it is happening behind the scenes of their life insurance policies and their index-fund investments.
Mattli is a political scientist, and his great insight is to consider the stock market more as a political entity than an
economic one. To Mattli, markets are first and foremost “political institutions governed by power relations.”
Different members have differing preferences when it comes to market structure and rules. When those members
have similar amounts of power, the result is often a democratic compromise in which the greater good prevails.
But when financial institutions garner for themselves an outsize degree of power and influence, they can end up
skewing the market structure in their favor, at the expense of ideals such as liquidity and trustworthiness. That, in
a nutshell, is what has happened in the global stock market-with the largest banks and brokerage companies
refashioning markets to serve their own ends.
Mattli’s book is the result of years of research into the history of the New York Stock Exchange and its member
companies. Granular detail about market regulation might not sound like the stuff of a great read. But Mattli spent
a lot of time in the nyse’s archives and interviewed many of its former employees and traders. As a result,
Darkness by Design has an uncommon richness to it.
Take a story that neatly illuminates how much has changed for the worse under today’s regulatory regime. Bob
Seijas, a 33-year employee of the nyse, told Mattli about a coworker who in the 1980s was fined $50,000 (well
above $100,000 in today’s dollars) because he left his post to go to the men’s room for eight minutes and gave
inadequate instructions to his assistant. The man in question worked as a specialist-an employee at the exchange
who serves as an intermediary between buyers and sellers. Part of his job was to buy into selling pressure-buying
stocks even as their prices were falling so as to ensure smoothly continuous trading. But when the specialist went
to the bathroom, his assistant didn’t keep buying, and the price of the stock he was charged with overseeing fell
sharply, by 75 cents. Seijas later defended the specialist, saying that the man had spent four hours performing
superbly before taking a bathroom break. A colleague simply retorted, “Don’t tell me he stopped at 20 red lights and
only passed one.”
Indeed, the specialist himself likely expected a penalty and understood that if negligence went unpunished, the
consequences for his chosen vocation would be much worse than a one-off $50,000 hit. From the 1980s all the
way to the early years of this century, any such breach of protocol was almost certain to be punished, reinforcing
the trust that all participants had in the market.
Specialists played a central role in maintaining that trust. They understood trading patterns, knew who the big
buyers and sellers were, and knew how best to match the two without affecting prices. They made money, but they
did so transparently, surrounded by traders who watched their every move. Attempts to front-run the marketbuying or selling ahead of a client’s pending order to pad one’s own profits at the expense of the client-were almost
always detected. The result was a market in which, as Mattli writes, almost everybody was “socialized into the
value system of the Exchange” and had strong financial and reputational incentives to live up to those values.
Those days are over. When the nyse was a monopoly, before 2005, a single rogue specialist could destroy the
reputation of the entire franchise, and so the exchange was always working to improve its governance standards.
But the nyse is no longer the only game in town. Today, there are 23 different registered “national securities
exchanges” in the United States, of which the nyse is merely the second largest, accounting for about 12 percent
of the total U.S. market. It competes directly with exchanges bearing names such as MiAx, Cboe byx, and Nasdaq
mrx (not to be confused with Nasdaq bx, Nasdaq gemx, Nasdaq ise, or Nasdaq phlx- none of which is the main
Nasdaq exchange that ordinary investors know about). And because it has to compete, the nyse has gone from a
powerful norm setter and regulator in its own right to just another market participant, trying to bolster its position
at any cost. Today, stock prices move up or down by 75 cents almost every minute of every day, and the nyse has
neither the ability nor the inclination to stop that from happening.
“In the new era of fragmented markets,” Mattli writes, “costly investments in good governance and commitments
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to fairness, equality, and transparency have to be balanced against an overriding new mandate to attract liquidity
to survive.” Exchanges do everything they can to attract the business of the major players, who do millions of
trades per second, often accommodating them in ways that benefit those players at the expense of other
participants in the market. Although no playing field is entirely level, today the market is much more tilted toward a
handful of ultra-sophisticated traders than it ever was during the days of the nyse’s monopoly.
The state bodies monitoring the exchanges suffer from the same lack of cohesion, with predictable results: when
an economic sector is governed by multiple regulators, actors will constantly engage in regulatory arbitrage,
rewarding the most lenient regulators while diverting their activities away from the most stringent. Before the 2008
financial crisis, for instance, two U.S. bank regulators-the Office of Thrift Supervision and the Office of the
Comptroller of the Currency-competed with each other to attract banks, which could choose which agency’s
regulation to submit to. That never made much sense, and lawmakers merged the two as part of the 2010 DoddFrank Wall Street Reform and Consumer Protection Act. But to this day, the Securities and Exchange Commission
(sec) and the Commodity Futures Trading Commission (cftc) compete with each other to regulate markets. (Blame
congressional politics: the cftc is governed by the House and Senate Agriculture Committees, whereas the sec is
governed by the House Financial Services Committee and the Senate Banking Committee.)
In earlier days, the concentration of market power at the nyse made up for this regulatory confusion. When it came
to stock trading, the exchange proved a much more capable regulator than the sec or any other federal agency
ever did. The nyse enforcement arm had deep institutional knowledge. It knew, for instance, that if a broker placed
a trade in IBM stock at 12:04:45 pm, he would need at least 22 seconds to walk over to a different specialist to
place a different trade. The nyse used this kind of information to conduct forensic examinations of suspicious
transactions, examinations that the sec would find completely impossible to perform.
Today, however, the regulators are on their own; the individual exchanges have all but abdicated even the pretense
of having a governance structure with any teeth. And as Mattli points out, “The creation of exploitative schemes by
particularly powerful actors to benefit themselves is rational in a system of bad governance because the chances
of getting caught are tiny and the reputational or material consequences of such behavior are largely insignificant
while the profits from such schemes are high.”
What caused this enormous change? The short answer is the Regulation National Market System, or Reg nms, a
rule promulgated in 2005 by the sec in the name of market efficiency. It ostensibly modernized markets by moving
stock trading away from the nyse and toward numerous other exchanges, but it also marked the death of the old
nyse. Up until that point, the exchange was a mutual society: firms could buy seats, and the exchange was owned
by its members. After 2005, it demutualized, stopped selling seats, and became just one among many exchanges,
most of which were owned and operated by enormous global broker-dealers-think Credit Suisse, Goldman Sachs,
and Merrill Lynch-that had spent limitless hours and dollars on lobbying the sec to push Reg nms through. Rather
than being a utility owned by its members, the nyse was now a profit-maximizing entity like all the other
On top of there being competition among the many new exchanges, every major broker-dealer also engages in
“internalization”-effectively acting as its own mini-exchange and fulfilling orders with its own inventory of shares
rather than sending them on to any exchange at all. Not so long ago, if you phoned up a broker and placed an order
to buy 100 shares of IBM, that order would likely be filled on the nyse. Today, HTFS compete with one another to
pay your broker for the privilege of taking the other side of your trade. This fragmentation benefits HTFS, who are
constantly searching for order flows that they can keep for themselves rather than having to compete for them on
an open market. It also helps the major global securities firms that orchestrated the end of the nyse monopoly in
the first place, since they are paid for-or take direct advantage of-the retail order flow that they generate. Between
them, these huge companies now have a market share north of 70 percent.
The big test of any stock market is whether it has depth: whether it’s possible to buy or sell a large number of
shares in a small amount of time without moving the market. Traders will naturally flock to such a market, creating
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even more depth-a virtuous cycle that results in monopolies, such as the one the nyse enjoyed until 2005. The
nyse’s monopoly, in turn, allowed it to be technically innovative, introducing everything from the first stock ticker
(1867) and the first trading-floor telephones (1878) to a system capable of processing four billion shares a day
(1999). No other stock exchange in the world could come close.
Today’s internalization, by contrast, has created a classic tragedy of the commons: big banks free-ride on the
nyse’s ticker, trading at the prices it publishes in real time, without contributing to its liquidity. The consequences
became clear during the “flash crash” of May 2010, when billions of dollars of value suddenly evaporated, only to
reappear minutes later. Without the deep liquidity and oversight of the old nyse there was no one to prevent
thousands of stocks from collectively plunging and then rebounding. Worse still, that kind of event happens every
day in individual stocks; the only unusual thing about the flash crash was that it took place in many stocks
As the flash crash proved, today’s market lacks depth. Large investors want to move billions of dollars in and out
of the stock market but cannot do so without prices moving against them, their orders being front-run by HTFS.
The HTFS who benefit from this system are the embodiment of what Adair Turner, then chair of the United
Kingdom’s Financial Services Authority, famously characterized as “socially useless” financial activity. They
reinvest their profits into machines that can trade in microseconds rather than milliseconds; those profits would
surely serve a higher purpose if they were invested in other parts of the economy. And as these outfits become
bigger and more sophisticated, they trade increasingly complex financial products-all invented by banks-across
dozens of markets and jurisdictions. No regulator can hope to keep up, so these highly secretive companies
effectively operate with no code, no morals, and no values. Their only motivation is profit.
Investors once hoped that so-called dark pools would offer a way out of the depth problem. Dark pools exploded in
popularity after 2005, since large institutions could no longer count on the nyse’s specialists to provide ample
liquidity and found themselves being outpaced by HTFS on smaller exchanges. Because orders placed in dark
pools are not visible to other traders until they have been executed, the hope was that HTFS would not be able to
make money front-running these transactions. In reality, however, even dark pools are infested with HTFS, whose
trade volume the pools rely on to remain profitable.
The HTFS are in control of the markets now. They are the must-have customers for any exchange, because they
drive most of the volume and liquidity in the market. The exchanges, many of them created to serve the HTFS,
cannot themselves prevent the latter’s dominance. Nor can regulators, who are confined to single markets in single
countries, whereas HTFS roam globally. By the time a regulator has found a vaguely suspicious transaction, the
algorithms HTFS use have long since moved on to something new.
Even when blatantly illegal activity happens right under their noses, regulators generally ignore it. From 2006 to
2010, the nyse gave HTFS a physical trading-speed advantage by openly allowing them to place their trading
computers right inside the exchange.
This practice was, as Mattli notes, a patent violation of securities law. But instead of punishing the nyse, the
regulators simply waited for the exchange to ask permission, which eventually it did. Then the sec granted that
permission. Other cases involve special order types, or soTs-extremely arcane forms of placing a trade, designed
to give HTFS an extra advantage over real-money investors. On rare occasions, the sec has levied fines on
exchanges for implementing soTs without permission, but the fines are tiny compared with the profits the soTs
Mattli has a whole chapter on various forms of market manipulation that are unequivocally harmful but ubiquitous.
There are the ways that banks have allowed HTFS into dark pools even after promising large investors that they
would not, for instance. There is quote stuffing-placing millions of essentially fake orders for stocks, at prices far
enough removed from the market price that the orders won’t ever be filled- which makes it impossible to see how
much liquidity there is in any given security. That happens 125 times per day, on average, across 75 percent of all
U.S.-listed equities. And there is spoofing-investors placing and then immediately withdrawing orders near the
Page 4 of 6
market price that they never actually intended to see through-which also happens every day in every major stock.
The nefarious activity is clear to all, as is the lack of any real enforcement. The regulators are not only captured by
the big banks; they are also completely out of their depth technologically. By some counts, the Financial Industry
Regulatory Authority, a private regulator overseen by the sec, monitors 50 billion market events per day. Its
computers flag about one percent of those-500 million events per day-and a single flag can create weeks of work
for a team of regulatory investigators. The vast majority of suspicious transactions likely go uninvestigated.
A couple of glimmers of hope remain. The European Union has made decent strides in improving investor
protections with a 2018 directive called MiFID II, a new version of the Markets in Financial Instruments Directive,
which forces exchanges to be much more transparent about conflicts of interest in their disclosures to investors.
In 2012, France implemented a 0.1 percent tax on the value of canceled or modified orders, which is a strong
disincentive to engage in quote stuffing or spoofing. And there are even occasional discussions, so far confined
largely to academia, about moving to so-called discontinuous markets, where stocks would be allowed to trade a
mere ten times per second-slow enough that HTFS could not front-run orders.
Ironically, the greatest hope of all may be that the technological arms race between HTFS and exchanges will
beco …
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